As a warehouse manager, you’re probably aware of how vital it is to measure your warehouse’s performance. Measurement is the step that ties all your other processes together and allows you to keep track of performance trends, gauge how efficiently you’re operating, uncover potential problems, manage risks, and much more.
There are several different ways to measure warehouse performance, like evaluating your business’ financial statements, conducting performance reviews, and using business metrics. But one of the most popular methods is to develop warehouse management KPIs (Key Performance Indicators), which measure how effectively your processes are reaching their goals and objectives—sort of like a report card for your warehouse. Each warehouse KPI analyzes a specific process or operation and gives you a result that shows how well that process is doing by comparing it to past numbers and benchmarks.
Most warehouse management KPIs can be applied to most warehouses, even though they all operate differently. But you may not need to use every KPI to reach your business goals. Instead, you can pick out just the ones that you find are most relevant to your current goals. So how do you find the KPIs you actually need? In this article, we will be discussing the following commonly used warehouse KPIs and what they can do for you:
Inventory KPIs are all about the stock of products that you have stored in your warehouse. They are perfect when you’re looking for a way to monitor how your inventory is moving. Popular inventory KPIs include inventory accuracy, shrinkage, carrying cost of inventory, inventory turnover, and inventory to sales ratio.
1. Inventory accuracy
Inventory accuracy refers to the match between the amount of inventory that has been tracked and the amount that is physically present in a warehouse. Inventory tracking is typically done automatically using a warehouse management system or inventory management system, but this number doesn’t always match the quantity of inventory that is actually physically present in the warehouse. This could be because of theft, damage, miscalculations, shortages on the supplier’s side, etc. The inventory accuracy KPI will show if there is a difference between the two values, by dividing the stock tracked by the system by the stock physically remaining in the warehouse. The closer the number is to 1, the more accurate your inventory tracking is.
Formula: Inventory as tracked by system / Physically present inventory
Shrinkage is one kind of mismatch in your inventory accuracy. It’s defined as excess inventory that is recorded in accounting but is no longer physically available, for reasons like theft, damage, or miscalculations.This KPI will show you the value of inventory that is missing from your warehouse due to those factors.
Formula: (Cost of recorded inventory – Cost of physically present inventory) / Cost of recorded inventory
3. Carrying cost of inventory
Carrying cost of inventory is the total amount of money a business spends on owning, storing and holding inventory. It represents how long your business can continue storing its inventory before you begin to lose money and need to find a new solution for slow-moving inventory and dead stock. Carrying costs can be calculated by dividing your total carrying costs by your average inventory costs.
Formula: Total carrying costs / Overall inventory costs
4. Inventory turnover
Inventory turnover is the frequency at which your inventory is being sold. A higher value indicates stronger sales and a lower value indicates weaker sales. Inventory turnover can be calculated in two ways: by dividing the number of sales made by your average inventory, or by dividing the cost of goods sold by your average inventory. Check out our tool to calculate your inventory turnover ratio.
Number of sales made / Average inventory
Cost of goods sold / Average inventory
5. Inventory to sales ratio
The inventory to sales KPI gives you the ratio of your remaining inventory at the end of the month to the sales you made during the same month. This value is very beneficial to anyone managing a warehouse because it helps:
Predict potential cash flow issues before they become a problem, by showing when rising inventory levels coincide with falling sales.
By pointing out how many items you have left in your warehouse at the end of the month, this ratio also tells you how many products you’ve sold. This can help you calculate how much stock you need to purchase to comfortably continue your sales without backorders.
The inventory to sales ratio is calculated by dividing your remaining inventory at the end of the month by the sales you made for the same month.
Formula: EOM inventory balance / Sales for the month
Receiving occurs when a warehouse accepts a delivery of stock that they then have to process, sort, and eventually store. Receiving KPIs like receiving efficiency, cost of receiving per line, and receiving cycle time are used to measure the effectiveness of the processes that take place in this stage.
6. Receiving efficiency
Receiving efficiency calculates the productivity of the work being done by your employees in the receiving area of your warehouse. This will help you decide whether to implement new training sessions or better processes.
Formula: Volume of inventory received / Number of staff hours worked
7. Cost of receiving per line
The cost of receiving per line refers to the total amount spent on receiving a line of products that have been sent to your warehouse from your vendors. This also includes the processes that take place while receiving, such as handling and accounting for each item. This cost should drop over time, indicating increasingly efficient work.
Formula: Total cost of receiving / Total number of items in each receiving line
8. Receiving cycle time
Receiving cycle time measures the average time taken to process received stock, which includes accounting for it, sorting it according to category, and then storing it.
Formula: Total time spent on sorting received stock / Total number of received items
Putaway is the process of storing a shipment of products that have been delivered, ideally in the most convenient and appropriate location in your warehouse. Putaway KPIs, like accuracy rate, putaway cost per line, and putaway cycle time can help you measure how these processes are performing.
9. Accuracy rate
Your accuracy rate calculates the proportion of items that have been put away correctly the first time. A value of 1 indicates that no errors or mistakes have occurred. This rate is calculated by dividing the amount of inventory that has been put away correctly by the total amount of inventory that has been put away.
Formula: Inventory put away correctly / Total inventory put away
10. Putaway cost per line
This KPI refers to how much it costs to put away a whole line of items. This indicator can help you reduce how much you spend on your overall putaway processes. It can be calculated by dividing the total cost of putaway by the number of line items.
Formula: Total cost of putaway / Total line items
11. Putaway cycle time
The putaway cycle time is the average time it takes to put away a single item of your inventory. Shorter putaway cycle times mean better warehouse efficiency. This time can be reduced by repositioning items in your warehouse and improving employee productivity.
Order management consists of all the processes that take place from the time your business receives a customer order to the time your customer receives what they purchased. These include accepting the order, picking the right products for it, packing them, shipping them to the correct delivery location, and lastly handling post-sales processes like returns and refunds. Therefore, order management KPIs revolve around determining how smoothly each of these processes is running.
12. Picking accuracy
This KPI tells you how accurately items are being picked from your warehouse for customer orders, so that you can improve the overall warehouse efficiency of your order management processes. Your picking accuracy should be as close as possible to 1, indicating no mistakes.
Formula: (Total number of orders – Incorrect item returns) / Total number of orders
13. Total order cycle time
Total order cycle time refers to the average time it takes an order to be shipped, starting from the moment the customer places the order. This includes all the processes that take place in between: accepting the order, picking the necessary items, packing them, and getting them ready to be shipped. The shorter this time, the better the chance of you retaining your customers.
14. Order lead time
Order lead time is the average time it takes an order to reach a customer after they’ve placed it. The order lead time is basically your order cycle time plus shipping time. As with total order cycle time, it’s better for your business if your order lead times are short.
15. Backorder rate
Formula: Total backorders / Total orders
16. Fulfillment accuracy rate
This KPI calculates the number of orders that have been successfully fulfilled from start to finish, out of the total number of customer orders received. This includes orders that have been correctly delivered, on time and consisting of the right products. If this rate is low, then your order management process needs to be examined and revised.
Formula: Orders completed without issues / Total orders received
17. On-time shipping rate
This indicator tells you how efficient your shipping processes are. It’s important to maintain a high on-time shipping rate in order to prevent customer dissatisfaction.
Formula: Number of orders that have been shipped on time or in advance / Total number of orders shipped
18. Cost per order
This KPI tells you how much it costs to fulfill one of your customer orders, from the moment the order is placed to the time it reaches the customer. Cost per order can be derived by dividing your total expenses spent on order fulfillment, by the total number of customer orders you’ve received.
Formula: Total fulfillment costs / Total number of orders
19. Rate of returns
The rate of returns tells you the percentage of customers that have returned their items, whetherbecause of factors you can fix (like damaged products, incorrect item sent, or late delivery) or factors out of your control (such as fraud or problems with the product after delivery). To find this rate, divide the number of items returned by the total number of items sold and convert to a percentage.
Formula: (Items returns / Items sold) * 100
Most large warehouses tend to use large equipment in their operations. While this equipment is helpful, it also has its risks. It’s best to keep an eye on KPIs related to accidents that take place in the warehouse to help prevent them in the future.
20. Accidents per year
This KPI tracks how many notable accidents have cost time and money during a year. The number should ideally be zero, but if it’s not, it can help you see the scale of the problem.
21. Time since last accident
This indicator shows you how much time it’s been since the last accident. You want to maintain a high number here, showing that accidents are few and far between.
Applying warehouse management KPIs can show you how your warehouse is doing over a certain period, so they’re especially useful when you’re looking to reach a specific goal or to improve certain areas that you suspect could use some work. There are many types of warehouse KPIs that each serve a different purpose, like monitoring your inventory, receiving, putaway, order management, and overall warehouse safety. So make sure you pick the right indicators that are relevant when measuring the performance of specific functions that you have in your warehouse. Learning the ins and outs of each one can help you figure out which KPIs you need.
Using a warehouse management system can help you maintain a smooth running warehouse, free of hiccups. Check out Zoho Inventory, a cloud-based warehouse management solution that can manage multiple warehouses, organize your sales and transfer orders, provide real-time data about your inventory, and give you accurate reports in a flash. Try our free trial today to learn more!